Mostostal Zabrze S.A.'s (WSE:MSZ) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 6x Mostostal Zabrze S.A. (WSE:MSZ) may be sending very bullish signals at the moment, given that almost half of all companies in Poland have P/E ratios greater than 13x and even P/E's higher than 28x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's superior to most other companies of late, Mostostal Zabrze has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Mostostal Zabrze

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mostostal Zabrze.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Mostostal Zabrze's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 104% last year. The strong recent performance means it was also able to grow EPS by 437% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings growth is heading into negative territory, declining 18% per year over the next three years. Meanwhile, the broader market is forecast to expand by 9.2% per year, which paints a poor picture.

In light of this, it's understandable that Mostostal Zabrze's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Mostostal Zabrze's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Mostostal Zabrze (1 makes us a bit uncomfortable!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.